California Launches Client Trust Program After Girardi Scandal

California attorneys must register client trust accounts and could be subjected to certified compliance reviews under new rules the state supreme court approved, the California Bar said Tuesday.

It’s a first for California which lagged other states such as Maryland in requiring reporting how much and where client trust funds are located. And it follows an audit finding that the bar failed to act on years of complaints that disgraced and disbarred attorney Tom Girardi didn’t hand over millions in awards to clients. Girardi and Girardi Keese LLP have since been forced into bankruptcy with hundreds of millions in claims against the estates.

Justices on Monday approved the program with requirements that exceeded those the bar recommended by requiring provisions that the bar had suggested it should be authorized to impose.

The bar must establish a program requiring attorneys to annually report whether they manage a client trust account, and, if so, certify they are knowledgeable about and in compliance with applicable rules. The program, under a new California Rule of the Court, Rule 9.8.5, requires all licensees responsible for client funds to annually register each and every trust account and supply the bar with the account numbers and financial institutions.

The bar may impose an annual self-assessment on client trust accounting duties and practices. If selected by the bar, the attorney must complete a compliance review by a certified accountant to be paid by the lawyer. And if selected, additional actions based on compliance review results may include an investigative audit, a notice of mandatory corrective action, and a referral for disciplinary action.

Failure to comply with the rules, effective Jan. 1, 2023, means the lawyer must be enrolled as inactive.

Bar Board of Trustees Chairman Ruben Duran said in a statement, “The Court recognizes that the State Bar has a duty and an obligation to protect the public, and this new program, which aligns with others already in place in other states, will help us do that.” By its design, the program “will help us assist attorneys in complying with client trust account requirements. It will also help us detect and address violations of ethics rules, and, when appropriate, refer attorneys for discipline.”

Client Rights, Education

The bar will develop and distribute new continuing legal education materials focused on promoting ethical management and distribution practices. The agency will also launch a public education campaign to raise awareness of clients’ rights regarding trust accounts opened on their behalf.

Justices approved revisions to Rule 1.15 to require lawyers to notify a client within 14 days after receiving funds or property on their behalf. A new comment to Rule 1.4 states that receiving client funds “ordinarily is also a significant development requiring communication with the client.”

Lawyers must disburse client funds within 45 days of the date they become undisputed. The rule has a rebuttable presumption that without evidence of good cause, the attorney is presumed to have violated the rule. Undisputed funds under Rule 1.15 are those funds or property a lawyer or firm possesses where the attorney or firm knows or reasonably should know the ownership interest is fixed and there are no unresolved disputes over the client’s or other person’s entitlement to receive the money or property.

The California Bar licenses more than 285,000 lawyers, with 195,540 active, licensed attorneys. The state supreme court oversees lawyer licensing, admission, and discipline. California attorneys also are subject to legislative oversight under the California Businesses and Practices Act.

The agency in January retained outside law firm Halpern May Ybarra Gelberg LLP to conduct an internal investigation to identify who may have helped dispatch discipline complaints against Girardi.